Magazine

The IPO Market: Pipsqueaks Need Not Apply

May 06, 2001

Could the initial public offering market finally be thawing out? After a long, harsh winter, signs of IPO life seem to be popping up like crocuses in spring. There's the pending $5 billion Kraft Foods offering, a deal by Prudential Insurance to raise $3.9 billion, and the announcement, on Apr. 19, of plans by Accenture, the former Andersen Consulting, to move ahead with a $1 billion offering.

But don't be fooled. This season's bloom isn't anything like the good old days, when an IPO of anything.com could be counted on to rocket upward. Now the IPO market is dominated by old-line companies that, for the most part, have size, brand name recognition, and, most importantly, profits. "You see companies coming to market that should--not some of these unproven, untested, immature companies we've seen the past few years," says Kyle Huske, market analyst for IPO.com, a Web site that tracks the offering market.

So, what's behind the push for mega-IPOs? A lot of the momentum is coming from Wall Street itself. Investment bankers, no longer able to peddle startups, have far more time on their hands these days. Instead, they are aggressively pushing far larger deals as companies set plans for spin-offs. "Wall Street needs to feed and now they have these mega-billion-dollar spin-offs," says Richard Peterson, chief market strategist at Thomson Financial Securities Data. "That's bolstering the IPO market right now, but that can only go so far."

Indeed, the surprise is that any company at all is willing to brave an IPO at the moment. The first quarter was the worst for IPOs since the end of 1990, with just 24 deals offered. Compare that with 121 in the opening quarter of 2000. Last year a total of 384 offerings hit the market; bankers now expect as few as 50 by yearend. The bulk of money raised, moreover, will come from just a few giant names. Of the $7.5 billion raised in the first quarter, nearly $7 billion went into just three megadeals: Agere Systems, the Lucent Technologies (LU) spin-off; KPMG Consulting (KCIN); and a Hong Kong oil outfit, CNOOC Ltd. "The only merchandise the Street's been able to bring to the table are proven companies with proven earnings and proven cash flow," says F. Jon Baranko, director of equity trading at Strong Capital Management Inc.

Even for these companies, however, the need to raise capital or spin off units outweighs the risks of going public in this market. Take the Kraft deal, slated for May or early June. Philip Morris Cos. (MO), Kraft's parent, plans to sell 10% to 15% of the company to pay down a portion of the $11 billion debt it owes for funding Kraft's acquisition of Nabisco Holdings Corp. in December. The company is also betting that putting distance between food and tobacco will bring Kraft more investor interest. "[Kraft's] value is being depressed by tobacco taint," says Romitha S. Mally, a food analyst with Goldman, Sachs & Co.

A TOUGH SLOG. But given the performance of some of the mega-IPOs this past winter and spring, investors shouldn't get too excited. Lucent's spin-off of Agere, for instance, wasn't exactly a barnburner. Lucent, which badly needed funds to pay down debt, cut Agere's offering price from $20 to $6. The company, which went public in March, trades for $6.60 now following a first-quarter loss of $148 million.

Not surprisingly, three of this year's best IPOs are energy companies; the top performer so far is Williams Energy Partners (WEG). The petroleum distributor has risen more than 50%, to $32.50 a share since February. "Energy is in this very sweet spot right now," says Jeffrey E. Heil, director of equity investments for the Regents of the University of California. But for most sectors, the 2001 IPO year is looking abysmal. KPMG is down 10% from its February debut; of this year's 27 IPOs only 11 are above the offer price.

If IPOs no longer provide a quick route to riches, at least these companies will be around in a year or two--and they're unlikely to be back with hat in hand. "The IPO investor wants to have some degree of confidence that this is likely to be the last funding you need," says Michael Christenson, technology investment banking chief at Salomon Smith Barney. Translation: Anything.com need not apply. By Darnell Little in Chicago with Marcia Vickers in New York